Certificates of deposit offer a relatively high CD rate of return for the level of risk that an investor must take. Though CD investors don't run the risk of losing money in the market, they do lose time by agreeing to lock up money for a specified number of months. As compensation, savers get a small bump in the rate of return.
For a larger deposit, around $100,000, savers get even higher CD rates by purchasing a jumbo CD. Recently, the spread between jumbo and regular CDs has been compressed. That means that someone with a load of cash to put into a CD won't get much of a premium on average for buying a jumbo CD over a non-jumbo. But that may be beginning to change for longer maturities.
The difference between a one-year regular CD and a jumbo CD has averaged 0.026 percent over 2013. The spread between the five-year jumbo and five-year regular CD has been an average of 0.031 percent. That's been creeping up since the end of July. The difference between a five-year jumbo and non-jumbo CD is now 5 basis points. A basis point is one-hundredth of 1 percentage point.
There are two reasons for variations in the spread between the types of CDs, according to Dan Geller, executive vice president of Market Rates Insight, a pricing consultant to the financial industry.
The first has to do with math.
"When rates decline, the absolute marginal difference between terms and jumbo and non-jumbo shrinks as well. For example, a non-jumbo 5-year CD is about 75 basis points and a jumbo is 78 basis points, a variance of 3 basis points or 4 percent," says Geller.
When the 5-year CD rate was 5 percent back in 2001, the 4 percent marginal variance was 25 basis points, he says.
The second reason for the fluctuation between jumbo and non-jumbo is based on demand. "Most jumbo CDs are corporate rather than consumer. Thus, in declining economic times, when businesses are faced with uncertainty, they are more likely to shift money to liquid accounts, such as money markets rather than lock it in a CD," Geller says.
How about you, would you rather have a liquid account or a CD?
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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.